New prepaid tuition season opens; good deal for some, not all

SEATTLE (AP) - As Washington's prepaid tuition program opens its doors to new investors Friday, parents may wonder if it's a good way to save for college.

The answer depends on the age of your children, your family's financial situation and some unknown factors such as how much tuition will go up in the future, inflation and the stock market. For years, Washington's Guaranteed Education Tuition program was a pretty good deal for most families saving for college. But four years ago, when in-state tuition and the price of each tuition credit under the GET program began skyrocketing, many questioned whether the program still made financial sense.

Experts say if you invest now, it would take at least six years and possibly longer for your investment to essentially break even. That wasn't the case before the recession that began in December 2007, when it only took three years to pay off.

That means it's a much better deal for parents of younger children, and less so for parents of children who are 13 or older, said Rachele Cawaring Bouchand, director of financial planning at Clark Nuber P.S. in Bellevue.

That's because young children will see many more years of tuition increases before they enroll in college.

Of course, investment returns are not the only or even the primary reason for putting money into the GET program.

Investors are guaranteed that no matter what happens to the stock market or state tuition, they will be able to pay for an academic year of tuition and mandatory fees at the state's most expensive college or university with 100 GET units. Tuition and fees at less expensive schools cost fewer units and housing is extra.

At today's price of $172 per tuition unit, tuition at the University of Washington or Washington State University would have to reach $17,200 for investors to break even. The current tuition and mandatory fees is about $12,000.

If your child is a preschooler, it's hard to beat the return on investment from putting their college money into a GET account, Bouchand said. Her analysis is based on expectations that tuition increases will average 8 percent a year over the next decade or so.

Parents of a baby would need to invest about $7,500 a year for the next 18 years and earn a 5.9 percent annual rate of return on that investment to beat the results of buying 400 GET units at the current price, which would add up to $68,800, Bouchand said.

If your kids are already in elementary school, parents may be able to beat the GET return with some luck and a 3 percent a year return on their investments. The "break even" point for the GET program, in Bouchand's opinion, is age 13. Investments at that age are no longer a good investment.

Bouchand's analysis jibes with that of GET program director Betty Lochner, who said parents whose children are six years away from college can still put their money in the GET program and come out ahead.

"The best time to invest is age 6 or under," she emphasized.

Parents of high school students should find another way to save, Lochner added.

Other financial advisers draw the line earlier. Some don't recommend GET investment past kindergarten because they believe other investments, such as other 529 college savings plans that are invested in the stock market, are likely to have bigger payoffs.

Troy Sapp, financial planner with Commence Financial Planning in Tacoma, said he wouldn't recommend GET investments for anyone but families with preschoolers.

"The GET program certainly isn't as attractive as it once was," Sapp said in an email. "But that said, I still think it's quite attractive for very young children."

Aimee Huff, senior vice president at ICON Consulting of Bellevue, notes that over the past 40 years, college tuition has increased at twice the rate of the consumer price index.

Since the gap between the cost of GET units and the current redemption price is about 46 percent, the financial planner, who has some of her own kids' college money in the GET program, estimates the breakeven point is six to seven years if inflation is expected to average 6 percent a year.

Others note that if public university tuition in Washington doesn't return to its old pattern of 7 percent yearly increases, the GET program could be a losing proposition for any kids who are out of diapers.

Lochner acknowledged the program is no longer a great way to make a profit on college savings, but that was never its intended use.

"We're trying to get more families, especially middle-income families, to think about planning ahead," and help their children minimize their need for student loans, she said.